x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number

Keyuan Petrochemicals, Inc.

(Exact name of registrant as specified in its charter)

Nevada

45-0538522

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

Qingshi Industrial Park

Ningbo Economic & Technological Development Zone

Ningbo, Zhejiang Province

P.R. China 315803

(86) 574-8623-2955

(Issuer's telephone number)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer

o

Accelerated Filer

o

Non-accelerated filer

o

Smaller reporting company

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes o No x

As of August 16, 2013, the Registrant has 57,646,160 shares of common stock outstanding and 5,333,340 shares of Series B Preferred Stock outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

4

Condensed Consolidated Balance Sheets

4

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7 – 22

Item 2.

Management’s Discussion and Analysis or Plan of Operation

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II – OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities And Use Of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this Annual Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Keyuan” “we,” “us” or “our” are references to the combined business of Keyuan Petrochemicals, Inc. and its consolidated subsidiaries. References to “Sinotech Group” are references to our wholly-owned subsidiary, Sinotech Group Limited, previously known as Keyuan International Group Limited”; references to “Keyuan HK” are references to our wholly-owned subsidiary, Keyuan Group Limited; references to “Ningbo Keyuan” are references to our wholly-owned subsidiary, Ningbo Keyuan Plastics Co.,Ltd.; references to “Ningbo Keyuan Petrochemicals” are to our wholly-owned subsidiary, Ningbo Keyuan Petrochemicals Co., Ltd; references to “Keyuan Synthetic Rubbers” are references to our wholly-owned subsidiary, Ningbo Keyuan Synthetic Rubbers Co., Ltd.; references to ”Guangxi Keyuan” are references to our wholly-owned subsidiary, Guangxi Keyuan New Materials Co.,Ltd. References to “China” or “PRC” are references to the People’s Republic of China. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” and dollar are to the U.S. dollar, the legal currency of the United States.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this report as anticipated, estimated or expected, including, but not limited to: competition in the industry in which we operate and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; Securities and Exchange Commission (the “SEC”) regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Keyuan Petrochemicals, Inc. (the “Company”) was incorporated in the State of Texas on May 4, 2004 in the former name of Silver Pearl Enterprises, Inc. The Company, through its wholly-owned subsidiary, Sinotech Group Limited, formerly Keyuan International Group Limited (“Keyuan International”) and its indirect subsidiaries, Keyuan Group Limited (“Keyuan HK”), Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”),Ningbo Keyuan Petrochemicals Co., Ltd. (Ningbo Keyuan Petrochemicals), Ningbo Keyuan Synthetic Rubbers Co., Ltd. (“Ningbo Keyuan Synthetic Rubbers”), and Guangxi Keyuan New Materials Co., Ltd. (“Guangxi Keyuan”) (collectively referred herein below as “the Group” ) are engaged in the manufacture and sale of petrochemical and rubber products in the People’s Republic of China (“PRC”).

(b) Other Events

In 2011, Company’s former auditor, KPMG, LLP (“KPMG”), brought certain issues to the Company’s Audit Committee’s attention through a March 28, 2011 memorandum and an April 18, 2011 letter (collectively, the “KPMG Memoranda”). KPMG requested that the Company’s Audit Committee conduct an independent investigation (the “Independent Investigation”) into those issues. On March 31, 2011, the Audit Committee elected to commence such Independent Investigation and engaged the services of independent counsel, Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”), which in turn engaged the services of Deloitte Financial Advisory Services LLP (“Deloitte”), as independent forensic accountants, and King & Wood, as Audit Committee counsel in the PRC. Pillsbury, Deloitte and King & Wood are collectively referred to herein as the “Investigation Team”. On September 28, 2011, the Independent Investigation was completed. The Independent Investigation identified possible violations of PRC laws and U.S. Securities laws, including the maintenance of an off-balance sheet cash account that was used primarily to pay service providers and other Company-related expenses. Total activity in the off-balance sheet cash account amounted to approximately $800,000 through December 31, 2010, with a net income statement effect of approximately $12,000, and $400,000 of activity in the off-balance sheet cash account for the period from January 1, 2011 to March 31, 2011, with a net income statement effect of approximately $192,000, at which time the Company ceased its use. The Independent Investigation identified certain other issues that could result in potential violations of PRC or U.S. laws.

On October 7, 2011, trading of the Company’s common stock was delisted by NASDAQ, and is currently quoted on the Over-the- Counter Bulletin Board (symbol: KEYP).

On March 1, 2013, the Company reached a settlement in a case filed by the United States Securities and Exchange Commission on February 28, 2013 in the United States District Court for the District of Columbia against the Company, alleging the Company violated Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 there under the settlement terms and without admitting or denying the allegation of the complaint, the Company will pay a $1 million civil penalty and will be permanently enjoined from violating certain securities law. On July 2, 2013, final judgment was issued by the United District Court for the District of Columbia approving the settlement, and the Company paid the penalty of $1 million on July 9, 2013.

The Company, with its PRC legal counsel, evaluated the matters identified in the Independent Investigation to determine the extent to which the Company may be exposed to fines and penalties in China. The Company has concluded that the extent to which it may be exposed to fines and penalties in the PRC is limited, and to date, has not received any PRC governmental or regulatory communication or inquiry related to these matters. However, management is currently unable to determine the final outcome of these matters and their possible effects on the consolidated financial statements.

7

(c) Going concern and management’s plans

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported net income and cash flows used in operations approximately $2.92 million and $67.1 million, respectively for the three months ended March 31, 2013, and a net loss and cash flows used in operations of approximately $5.85 million and $7.1 million, respectively for the year ended December 31, 2012. At March 31, 2013 and December 31, 2012, the Company had a working capital deficit of approximately $162 million and $159 million, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets, or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

The Company continues to finance its operations primarily through short-term bank borrowings. Short-term bank borrowings and bills payable amounted to approximately $557 million at March 31, 2013. Management expects that short-term bank financing will continue to be available through at least March 31, 2014.

The Company continues to benefit from favorable PRC tax policies related to consumption tax (Note 4) of approximately $76.9 million of which was refundable at March 31, 2013. Approximately $67.7 million was refunded in July 2013, and management expects that additional consumption tax deposits of approximately $25 million will be refunded more promptly in the second half of 2013.

The Company is expanding its production line to include Styrene-Ethylene-Butylene-Styrene (“SEBS”). Management expects production and sale of SEBS to commence in October 2013, and that SEBS will yield a higher gross margin than some of the Company’s current products.

The Company is also exploring sources of additional financing, including short-term financing from its vendors and other parties. In addition, the Company is closely monitoring its cash balances, cash needs and expense levels.

The ability of the Company to continue as a going concern is dependent upon management’s ability to implement its strategic plan, obtain additional capital and generate net income and positive cash flows from operations. There can be no assurance that these plans will be sufficient or that additional financing will be available in amounts or terms acceptable to the Company, if at all.

2 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the financial statements of the Company and its subsidiaries . All intercompany balances and transactions are eliminated in consolidation. The financial statements have been prepared in accordance with U.S. GAAP applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2012 and 2011, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computation as the audited financial statements for the years ended December 31, 2012 and 2011. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

8

Change in Accounting Estimate:

During January 2013, management performed an assessment of the useful lives of certain machinery and equipment. In evaluating the useful lives, management considered the historical life of the assets, operational strategy, and related functionality. Management concluded that machinery and equipment would remain in service longer than the depreciable life originally assigned. Effective February 1, 2013, the Group changed the time period over which it depreciates machinery and equipment to 20 years from 15 years. Management believes that this change more clearly and appropriately reflects the state of the machinery and equipment and thus, will more reasonably and accurately report the value of the machinery and equipment on the balance sheet. This change is being accounted for as a change in estimate. This change in estimate resulted in a reduction of depreciation expense of approximately $561,000 for the three months ended March 31, 2013.

3 INVENTORIES

Inventories consist of the following:

March 31,

December 31,

2013

2012

($’000)

($’000)

(Unaudited)

Raw materials

$

30,819

$

26,433

Finished goods

21,273

21,701

Work-in-process

5,172

500

Total

$

57,264

$

48,634

4 CONSUMPTION TAX REFUND RECEIVABLE

The PRC government enacted a regulation that provides that domestically purchased heavy oil to be used for producing ethylene and aromatics products will be exempted from a consumption tax. In addition, the consumption tax paid for imported heavy oil is refunded if it is used for producing ethylene and aromatics products. Given all the Group’s purchased heavy oils are, or are to be, used for the production of ethylene and aromatics products, the Group recognizes a consumption tax refund receivable when the consumption tax has been paid and the relevant heavy oils have been used for production. At March 31, 2013 and December 31, 2012, the Group recorded an estimated consumption tax refund receivable of approximately $76.9 million and $51.3 million, respectively.

9

In July 2013, a refund of approximately $67.7 million was received, and a refund of $25 million is expected to be approved and received by the end of August 2013.

5 OTHER CURRENT ASSETS

Other current assets consist of the following:

March 31,

December 31,

2013

2012

($’000)

($’000)

(Unaudited)

VAT recoverable

$

38,868

$

31,751

Customs deposits for imported inventories

13,969

21,648

Other

4,152

2,921

$

56,989

$

56,320

Management estimates the deductible input VAT using vendor contracts, engineering and other estimates, as well as historical experience. Approximately $2.4 million and $2.2 million are included in non-current assets as of March 31, 2013 and December 31, 2012, respectively.

Customs deposits for imported inventories represent amounts paid to the local customs office in connection with the import of raw materials inventories. Upon approval by the customs authorities, these amounts become refundable by the local tax authority and are reclassified as consumption tax refund receivable (Note 4).

6 SHORT-TERM BANK BORROWINGS

Short-term bank borrowings consist of the following:

March 31,

December 31,

2013

2012

$(’000)

$(’000)

(Unaudited)

Bank borrowings-secured/guaranteed

$

442,853

$

295,146

As of March 31, 2013, short−term bank borrowings outstanding carried a weighted average interest rate of 6.17% (2012: 6.21%) for bank loans in RMB; and a weighted average interest rate of 2.63% (2012: 3.97%) for bank loans in USD, and had maturity terms ranging from two to twelve months and interest rates ranging from 1.0% to 6.72% (2012: 1.37% to 7.93%).

10

As of March 31, 2013, approximately $74 million included in short term bank borrowings was payable to Shanghai Pudong Development Bank, and was secured by a one-year fixed term deposit and pledged deposits with a carrying amount of $50 million. In addition, as of March 31, 2013, $175 million payable to Bank of China was secured by a one-year fixed term deposit with a carrying amount of $79 million; $77 million payable to China Construction Bank was secured by a one-year fixed term deposit with a carrying amount of $34 million; $33 million payable to Agricultural Bank of China was secured by a one-year fixed term deposit with a carrying amount of $12 million; $21 million payable to China Merchant Bank was secured by a one-year fixed deposit with a carrying amount of $10 million; $9 million payable to Bank of Shanghai was secured by a one-year fixed deposit with a carrying amount of $5 million; $23 million payable to Bank of Ningbo was secured by a one-year fixed deposit with a carrying amount of $5 million; $21 million payable to Bank of Communication was secured by a one-year fixed deposit with a carrying amount of $12 million. Among the rest of the Group's short-term borrowings, as of March 31, 2013, $149 million was guaranteed by related party and third-party entities and individuals, and $37 million was secured by the Group’s land, buildings and equipment with a carrying amount of $92 million.

7 SHARE-BASED PAYMENTS

(a) Employee stock option grants

The Board of Directors has approved the Company’s 2010 Equity Incentive Plan (the “Plan”). The maximum number of shares of common stock of the Company issuable pursuant to the Plan is 6,000,000 shares. The Plan shall be administered by the Board; provided however, that the Board may delegate such administration to a Plan Committee (the “Committee”).

Subject to the provisions of the Plan, the Board and/or the Committee shall have authority to determine the type or types of awards to be granted to each participant under the Plan. The exercise price of options to purchase shares of the Company’s common stock granted under the Plan shall be determined by the Board or the Committee, provided, however that the exercise price of any incentive stock option shall not be less than 100% of the fair market value of a share on the date of grant. The term of each option shall be fixed by the Board or the Committee, provided that no incentive stock option shall have a term greater than 10 years.

On January 1, 2012, the following stock options were outstanding:

(i) 3,000,000 stock options to certain senior management employees with a contractual term of 5 years. The exercise price of these stock options is $4.20 per share and the grant-date fair value of these stock options amounted to approximately $3.3 million. A total of 2,810,000 stock options vest over three years as follows: 30% shall vest and become exercisable one year after grant date, 40% shall vest and become exercisable two years after grant date, and 30% shall vest and become exercisable three years after grant date. For the remaining 190,000 stock options: 40% shall vest and become exercisable one year after grant date and 60% shall vest and become exercisable two years after grant date.

(ii) 80,000 stock options to two independent directors with contractual terms of 5 years. The exercise price of these stock options is $4.20 per share and the grant-date fair value of these stock options amounted to approximately $0.1 million. A total of 40,000 options shall vest and become exercisable one year after the grant date and the remaining 40,000 options shall vest and become exercisable two years after the grant date, provided that the independent directors are re-elected for successive one year terms one year after the stock options issuance date.

11

(iii) 700,000 stock options to employees with a contractual term of 5 years. The exercise price of these stock options was $4.50 per share and the grant-date fair value of these stock options amounted to approximately $1.3 million. These stock options vest over three years as follows: 30% shall vest and become exercisable one year after the grant date, 40% shall vest and become exercisable two years after the grant date and 30% shall vest and become exercisable three years after the grant date. 600,000 of these stock options were cancelled. As compensation for such cancellation, the Company committed to pay these employees incremental cash payments during the period through August 2013. The fair value of the committed cash payment at the date of commitment was approximately $0.4 million and no incremental compensation cost resulted from the cancellation of these stock options. Included in accrued expenses and other payables are approximately $0.2 million and $0.2 million representing the liability related to the committed cash payment as of December 31, 2013 and 2012, respectively.

There were no share options granted during the three months ended March 31, 2013.

As of March 31, 2013, unrecognized compensation costs related to employee stock options was approximately $0.4 million. These costs are expected to be recognized on a straight-line basis, over the remaining weighted average service period of 0.19 years.

8 COMMITMENTS CONTINGENCIES

(a)Contingencies

In connection with the shipping of finished products, inaccurate product information was previously provided to the PRC Port authority. In addition, through March 31, 2011, Ningbo Keyuan failed to withhold income tax of approximately $50,000 from payments to certain external service providers and employees. In consultation with PRC legal counsel, management has evaluated the contingencies associated with the provision of inaccurate information and expects that the penalty, if any, will not be significant and will not have a material impact on the consolidated financial statements.

In addition, the Group had outstanding Letter’s of Credit as of March 31, 2013 of approximately $187 million.

9 INCOME TAXES

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate for the three months ended March 31, 2013 was approximately 31%. Tax losses were incurred in different jurisdictions during the three months ended March 31, 2013, which resulted in a higher effective tax rate for the period. The Company paid income taxes of $1.6 million during the first three months of 2013, which was included in income taxes payable at December 31, 2012.

12

10 EARNING PER SHARE

The following table sets forth the computation of basic net income per share:

Three months ended March 31,

2013

2012

($’000)

($’000)

Basic earnings per share:

Net income attributable to Keyuan

Petrochemicals, Inc. stockholders

$

2,918

$

1,638

Fixed dividends to Series B convertible

Preferred stockholders

-

-

Net income attributable to Keyuan

Petrochemicals Inc. common stockholders

$

2,918

$

1,638

Weighted average common share

(Denominator for basic income per share)

57,646,160

57,646,160

Effect of diluted securities:

-Series A convertible preferred stock

-

-

-Series B convertible preferred stock

5,333,340

-

-Series M convertible preferred stock

-

-

-Warrants

-

-

-Options

-

-

62,979,500

62,979,500

Basic net income per share:

$

0.05

$

0.03

Diluted net income per share:

$

0.05

$

0.03

The following table represents the warrants and options excluded from the calculation of diluted earnings per share:

March 31,

2013

March 31,

2012

Warrants

4,396,118

4,396,118

Options

3,490,000

3,490,000

11 FAIR VALUE MEASUREMENTS

The Company did not have any assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and 2012.

The fair values of cash, pledged bank deposits, bills receivable, accounts receivable, short-term bank borrowings, bills payable, and accounts payable approximate their respective carrying amounts due to their short-term nature. Amounts due to related parties are not practicable to estimate due to the related party nature of the underlying transactions.

13

12 SIGNIFICANT CONCENTRATIONS AND RISKS

At March 31, 2013 and December 31, 2012, the Group held cash and pledged bank deposits in financial institutions of approximate $273 million and $225 million, respectively. They were primarily held in major financial institutions located in mainland China and the Hong Kong Special Administrative Region, which management believes have high credit ratings.

As of March 31, 2013, sales to major customers, which individually exceeded 10% of the Group’s total annual net revenue, were as follows:

For three months ended

March 31, 2013

For three months ended

March 31, 2012

Largest

Customers

Amount of

Sales

($’000)

(Unaudited)

%

Total Sales

(Unaudited)

Largest

Customers

Amount of

Sales

($’000)

(Unaudited)

%

Total Sales

(Unaudited)

Customer A

30,853

15

%

Customer B

17,710

10

%

The Group currently buys a majority of its heavy oil, an important component of its products, from three suppliers. Although there are a limited number of suppliers of the particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for the three months ended March 31, 2013 and 2012 were approximately $170 million and $105 million, respectively. These purchases represented 83% and 79%, respectively of all of the Group’s purchases for the three months ended March 31, 2013 and 2012. The Company’s largest supplier accounted for approximately $127 million and $89.1 million, or 62% and 67% of total purchases for the three months ended March 31, 2013 and 2012, respectively. In addition, the supplier provided short-term financing to the Company during 2012, $20 million which was included in accounts payable at January 1, 2013, and was repaid on January 7, 2013. No such short−term financing was provided during the three months ended March 31, 2013. Approximately $75 million of short−term financing was provided by the supplier from April to July 2013. In addition, at January 1, 2013, the Company owed the supplier $10 million in connection with a non-interest bearing advance. This was repaid in full on January 8, 2013.

The Group’s operations are carried out in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittances abroad, and rates and methods of taxation, among other things.

14

13 RELATED PARTY TRANSACTIONS AND RELATIONSHIPS AND TRANSACTIONS WITH CERTAIN OTHER PARTIES

(A) Related Party Transactions

The Company considers all transactions with the following parties to be related party transactions.

Name of parties

Relationship

Mr. Chunfeng Tao

Majority stockholder

Mr. Jicun Wang

Principal stockholder

Mr. Peijun Chen

Principal stockholder

Ms. Sumei Chen

Member of the Company’s Board of Supervisors and spouse of Mr. Wang

Ms. Yushui Huang

Vice President of Administration, Ningbo Keyuan

Ningbo Pacific Ocean Shipping Co., Ltd

100% ownership by Mr. Wang

(Ningbo Pacific)

Ningbo Xinhe Logistic Co., Ltd

10% ownership by Ms. Huang

(Ningbo Xinhe)

Ningbo Kunde Petrochemical Co, Ltd.

Mr. Tao’s mother was a 65% nominee shareholder

(Ningbo Kunde)

for Mr. Hu, a third party through September 2011

Related party transactions and amounts outstanding with related parties as of and for the three months ended March 31, 2013 and 2012, are summarized as follows:

Three months ended March 31,

2013

2012

$(’000)

$(’000)

(Unaudited)

(Unaudited)

Purchase of transportation services (a)

$

628

$

561

Loan guarantee fee (b)

$

23

$

91

Amounts due from related parties (c)

$

698

$

-

Amounts due to related parties (d)

$

-

$

114

(a) The Group purchased transportation services of approximately $0.6 million from Ningbo Xinhe during each of the three months ended March31, 2013 and 2012.

15

(b) Guarantees for Bank Loans

Guarantee provided during for

three months ended March 31,

Bank loans Guaranteed as of

2013

2012

March 31,

2013

December 31, 2012

($’000)

($’000)

($’000)

($’000)

(Unaudited)

(Unaudited)

(Unaudited)

Mr. Tao

$

-

$

-

$

-

$

15,840

Jicun Wang and Sumei Chen

-

-

-

1,899

Ningbo Pacific

-

-

70,086

23,976

Total

-

-

$

70,086

$

41,715

Beginning in 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. During the three months ended March 31, 2013, loan guarantee fees were approximately $0.02 million for Ningbo Pacific. In 2012, loan guarantee fees were approximately $0.03 million and $0.06 million for Ningbo Hengfa and Ningbo Pacific, respectively.

(c) Amounts due from related parties consist of the following.

For three months ended March 31,

2013

2012

($’000)

($’000)

(Unaudited)

(Unaudited)

Ningbo Xinhe (prepaid transportation expenses)

$

650

$

-

Mr. Chunfeng Tao

48

-

Total

$

698

$

-

(d) Amounts due to related parties consist of the following.

For three months ended March 31,

2013

2012

($’000)

($’000)

(Unaudited)

(Unaudited)

Ningbo Xinhe

$

-

$

114

(B) Relationships and transactions with certain other parties

The Group has following relationships and transactions with certain other parties:

Name of parties

Relationship

Ningbo Litong Petrochemical Co., Ltd

(Ningbo Litong)

Former 12.75% nominee shareholder of Ningbo Keyuan

Ningbo Anqi Petrochemical Co., Ltd

(Ningbo Anqi)

A related party through September 2011 when control transferred

Ningbo Kewei Investment Co., Ltd.

(Ningbo Kewei)

A related party through September 2011 when control transferred

Ningbo Kunde Petrochemical Co, Ltd.

(Ningbo Kunde)

A related party through September 2011 when control transferred

16

Transactions and amounts outstanding with these parties for the three months ended March 31, 2013 and 2012 were summarized as follows:

Three months ended March 31,

2013

2012

($’000)

($’000)

(Unaudited)

(Unaudited)

Sales of products (e)

$

41,072

$

22,287

Purchase of raw materials (f)

$

26,716

$

446

Guarantee for bank borrowings (g)

$

-

$

25,344

Loan guarantee fees (g)

$

517

$

-

Amounts due to these parties (h)

$

851

$

4,019

Amounts due from these parties (i)

$

25,910

$

-

(e) The Group sold finished products of approximately $10.2 million and $10.1 million to Ningbo Litong during the three months ended March 31, 2013 and 2012, respectively, and sold finished products of approximately $30.9 million and $12.2 million to Ningbo Kunde during the three months ended March 31, 2013 and 2012, respectively.

(f) The Group purchased raw materials of approximately $0.5 million from Litong during the three months ended March 31, 2012. During the three months ended March 31, 2013, the Group purchased raw materials of approximately $2.7 million and $24.0 million from Kunde and Kewei, respectively.

(g) Guarantees for Bank Loans

Guarantee provided during the

three months ended March 31,

Bank loans Guaranteed as of

2013

2012

March 31,

2013

December 31, 2012

($’000)

($’000)

($’000)

($’000)

(Unaudited)

(Unaudited)

(Unaudited)

Ningbo Litong

$

-

$

25,344

$

56,380

$

30,710

Ningbo Kewei

-

-

199,372

122,651

Total

$

-

$

25,344

$

255,752

$

153,361

Beginning in January 2011, loan guarantee fees of approximately 0.3% of the loan principal guaranteed after January 2011 are to be paid quarterly. Guarantee fees paid to Litong and Kewei were approximately $0.2 million and $0.3 million for the three months ended March 31, 2013, respectively.

(h) At March 31, 2013, amounts due to certain other parties consist of amounts due to Kunde and Kewei of $0.8 million and $0.1 million, respectively.

(i) At March 31, 3013, amounts due from certain other parties consist of amounts due from Litong, Kunde and Kewei of $13.6 million, $7.4 million and $4.9 million, respectively. These amounts are included in accounts receivable and prepayments to suppliers on the condensed consolidated balance sheet.

17

14 CONSOLIDATED SEGMENT DATA

Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure. The Company reports financial and operating information in the following two segments:

(b) Rubber Segment: Manufacturing and sales of various rubber products.

Prior to June 2012, the Company had one operating segment, the Petrochemicals Segment. The segment information in the following tables reflects the establishment of the Rubber Segment for the three months ended March 31, 2013.

Three Months Ended March 31, 2013

Petrochemical

Rubber

Total

($'000)

($'000)

($'000)

(Unaudited)

(Unaudited)

(Unaudited)

Revenue

$

181,594

$

27,960

$

209,554

Income (loss) from operations

$

(337

)

$

6,022

$

5,685

Total assets

$

675,823

$

93,253

$

769,076

18

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Keyuan for the nine months ended March 31, 2013 and 2012 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Operating through our wholly-owned subsidiaries, Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”), Ningbo Keyuan Petrochemicals Co., Ltd (“Ningbo Keyuan Petrochemicals”), Keyuan Synthetic Rubbers Co., Ltd (“Keyuan Synthetic Rubbers”) and Guangxi Keyuan Co.,Ltd (“Guangxi Keyuan”), our operations include (i) a production facility with an annual petrochemical production capacity of 720,000 metric tons (MT) of a variety of petrochemical products, (ii) facilities for the storage and loading of raw materials and finished goods, and (iii) a manufacturing technology that can support our manufacturing process with relatively low raw material costs and high utilization and yields, all of which are led by a management team consisting of petrochemical experts with proven track records from some of China’s largest state-owned enterprises in the petrochemical industry.

Due to China’s growing demand for refined petrochemical products, we expanded our annual production capacity from 550,000 MT to 720,000 MT in April 2011. We also completed the construction of a Styrene-Butadience-Styrene (the “SBS”) production facility with an annual production capacity of 70,000 MT in September 2011 and began initial trial production in October and November 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August 2012.

In January 2012, we signed a cooperation agreement with Fangchenggang City to build a new petrochemicals production facility, Guangxi Keyuan New Materials Industrial Park, in Guangxi Province (the "Guangxi Project"). Once the facility is fully operational, it is expected to have an annual production capacity of 400,000 metric tons of Acrylonitrile Butadiene Styrene (the "ABS") and related products. As of the date of this filing, we have been focused on the complex pre-construction government approval work and on research to improve the efficiency of the production of Guangxi Project since the signing of the agreement.

19

Our organization chart is as follows:

Our Facility and Equipment

Facility

As of March 31, 2013, we have invested a total of approximately $32.02 million in the construction and improvement of our production facility. Our current production facility encompasses approximately 1.3 million square feet, including 594,000 square feet for production and 19,500 square feet for laboratories and offices. We also acquired the land use right of an additional 1.2 million square feet of land in August 2010 for our future expansion.

We have a total of 100,000 MT of storage capacity, consisting of 50,000 MT of storage capacity for raw materials and 50,000 MT for finished products. As part of our expansion plan, we intend to add 80,000 MT of new storage capacity in 2013, after which our total storage capacity will be 180,000 MT. The Company entered into the first phase of construction of the new storage capacity in August 2012, and approximately 30,000 MT of new capacity has been completed through June 2013. The project is currently in the anti-rust treatment and commissioning stage.

We have an on-site ocean shipping dock with 5,000 MT of shipping capacity and a 10-truck loading facility. Approximately 90% of our feedstock and finished products use this shipping dock. We also have adjacent access to another shipping dock with an additional 50,000 MT of shipping capacity.

We manufacture and supply a variety of petrochemical products, including BenzeneToluene-Xylene Aromatics (BTX Aromatics), propylene, styrene, liquid petroleum gas (LPG), Methyl Tertiary Butyl Ether (MTBE),Styrene butadiene styrene (SBS), and other petrochemicals, each of which is described below:

●

BTX Aromatics: consists of benzene, toluene, xylene and other chemical components used for further processing into plastics, gasoline and solvent materials widely used in paint, ink, construction coating and pesticide;

●

Propylene: a chemical intermediate which is one of the building blocks for an array of chemical and plastic products that are commonly used to produce polypropylene, acrylonitrile, oxo alcohols, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances;

●

Styrene: a precursor to polystyrene and several copolymers widely used for packaging materials, construction materials, electronic parts, home appliances, household goods, home furnishings, toys, sporting goods and other products;

●

LPG: a mixture of hydrocarbon gases used as fuel in heating appliances and vehicles. A replacement for chlorofluorocarbons as an aerosol propellant and a refrigerant which reduces damage to the ozone layer;

●

MTBE & Other Chemicals: MTBE, oil slurry, sulphur and others which are used for a variety of applications including fuel components, refrigeration systems, fertilizers, insecticides and fungicides; and

●

Styrene butadiene styrene (SBS): a thermoplastic elastomer with features similar to rubber, widely used in the manufacture of resin, shoes, tape, tubes and asphalt.

Production Capacity and Expansion

Our annual designed manufacturing capacity was 550,000 metric tons of a variety of petrochemical products at the end of 2010. We upgraded the catalytic pyrolysis processing equipment used in production facilities to expand the capacity from 550,000 MT to 720,000 MT. This capacity expansion project started in March 2011 and was completed in April 2011.

In September 2011, we completed building a new facility designed for producing Styrene-Butadience-Styrene (the “SBS”), one of the Styreneic Block Copolymers. SBS is a product with higher product margin with significant applications in the footwear, adhesive, polymer modification and modified asphalt industries. The SBS facility was built on part of the 1.2 million square feet of land for which we obtained the right of use in August 2010. The construction started in September, 2010 and was completed as scheduled in September 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August 2012. The designed capacity of the SBS facility allows for production of up to 70,000 metric tons per year. The SBS facility achieved a 41% utilization rate in 2012, as the first full year of production, and generated approximately $71.1 million in sales and $7.7 million in profit. We expect to generate net profit margins of 10% from our production of SBS once the facility reaches normal production levels, which means the actual production volume reach more than 80% of the design capacity. However, market conditions, the volatility of feedstock and SBS product prices can significantly impact the estimated profitability and we cannot guaranty that our SBS production will reach more than 80% of the design capacity in the near future.

21

The following chart depicts our production capacity in 2012:

Breakdown of 2012 Capability of 693,895 (MT)

Other than the utilization rate for SBS facility discussed above, the utilization rates for our other facilities are as follows:

●

styrene production: 88%;

●

propylene: 78%;

●

LPG: 85%;

●

BTX Aromatic: 105%; and

●

MTBE & others: 50%

22

Most of our facilities have been operating since 2009, so the current utilization rates for each product (except for the newly developed SBS) has been optimized to achieve stable output, less raw material cost and less equipment maintenance. We also made slight adjustments to the utilization rate for the BTX Aromatic facility to reduce the output to achieve more stable production conditions. We have been working on existing equipment upgrades to achieve increased stabilized production. However, in order to develop our business to meet increasing customer demands, optimizing the utilization rates for our current facilities is not adequate to achieve our goals. More specifically, the increasing market demand in tire and auto parts has resulted in increasing market demand for styrene, ABS and SSBR; and higher requirements related to environmental protection imposed by the PRC government has lead to higher demand for transformer oil and catalytic cracking oil. Based on these market trends, rather than focusing on optimizing our current utilization rates for our different facilities, we have been focusing on the following improvements to our infrastructure to expand our manufacturing capacity:

a)

an ABS production facility in Guangxi Province, which will have an annual production capacity of 400,000 MT of ABS. The Company began pre-construction activities in February 2012, and the first phase is expected to be completed by the forth quarter of 2014;

b)

an oil catalytic cracking processing facility as an extension of our catalytic pyrolysis processing equipment, as well as the feed way of the main raw materials to produce synthetic rubber. This facility can reduce production costs and the market risk in the purchase of raw materials, and improve the stability and efficiency of project production to 200,000 MT of heavy oil per year;

c)

an increased annual design capacity of our ethylene-styrene facility from 80,000 MT to 200,000 MT, among which 120,000 MT can be used for producing synthetic and 80,000 MT can be sold to downstream petrochemical companies. Ethylene-styrene is the main raw material (eg. Bezene) from the catalytic cracking oil processing facility to produce styrene. This facility can be considered the bridge between original products and high-value added products and will complete the integration of internal resources;

d)

a transformer oil facility using hydrogen from the ethylene-styrene facility to complete a double hydrogenation process on original products (BTX Aromatic) for refining transformer oil, and producing high value transformer oil with a design capability of 100,000 MT per year; and

e)

an SSBR (Solution Polymerized Styrene Butadiene Rubber) production facility with a design capability of 150,000 MT per year, that will use its own production process technology in synthetic rubber, combining styrene and butadiene, to produce SSBR. This product can be used as raw materials for tires, instead of imported hexakis (methoxymethy) melamine (“HMMM”).

We registered our catalytic oil processing facility and transformer oil plant with the Ningbo local government in February 2013, and expect it to be completed and operational in late 2013, at which time we will be able to produce medical use and edible products such as tubes and chewing gum.

The total estimated cost of processing equipment for product refinement and the SSBR production facility is approximately $149.3 million, including $49.8 million for processing equipment and $99.5 million for the SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs. Upon full completion of our expansion, our total production capacity will reach 2,443,000 MT per year including, but not limited to, our current petrochemical production of 720,000 MT, styrene of 200,000 MT, catalytic cracking oil of 200,000 MT, ABS of 400,000 MT, SSBR of 150,000 MT and transformer oil of 100,000 MT. The following chart depicts the breakdown of our planned production capacity of 2,443,000 MT.

23

Capacity Breakdown after expansion projects (2,443,000 MT)

We are currently evaluating the timeline for our expansion projects. Our current estimate is as follows:

Expansion Project

Expected Completion Date

Oil Catalytic Processing Facility

End of Q4, 2013

Ethylene-Styrene Facility

End of Q4, 2014

Transformer Oil Facility

End of Q4, 2014

SSBR production facility

End of Q4, 2015

ABS Production Facility

End of Q4, 2014

Manufacturing and Sales

Our total production of finished products was 188.117 MT for the three months ended March 31, 2013, and we generated $210 million in revenue based on the sale of 184,581 MT of petrochemical products.

Results of Operations

The following table sets forth information from our statements of comprehensive income for the three months ended March 31, 2013 and 2012.

24

Comparison of the three ended March 31, 2013 and 2012 (in thousands)

For the three months

Year to Year Comparison

Ended March 31,

Increase

Percentage

2013

2012

/(Decrease)

change

Sales

$

209,554

$

183,325

$

26,229

14.31

%

Cost of sales

200,732

173,852

26,880

15.46

%

Gross profit

8,822

9,473

(651

)

(6.87

)%

Operating expenses

Selling expenses

167

253

(86

)

33.99

%

General and administrative expenses

2,970

2,610

360

13.8

%

Total operating expenses

3,137

2,863

274

9.57

%

Income from operations

5,685

6,610

(925

)

14

%

Other income (expenses):

Interest income

751

939

(188

)

(20

)%

Interest expense, net

(3,396

)

4,379

1001

22

%

Foreign exchange gain (loss), net

1,553

(178

)

1,731

(972

)%

Non-operating income (expenses)

(380

)

(8

)

(372

)

4,650

%

Total other expenses

(1,472

)

(3,626

)

2,154

(59.41

)%

Income before income taxes

4,213

2,984

1,229

41.18

%

Income tax expense

1,295

1,346

(51

)

4

%

Net Income

2,918

1,638

1,280

78.14

%

Other comprehensive income

Foreign currency translation adjustment

531

577

(46

)

8

%

Comprehensive income

$

3,449

2,215

1,234

55

%

Sales: Our sales for the three months ended March 31, 2013 were approximately $209.6 million, compared to sales of $183.3 million for the three months ended March 31, 2012, an increase of $26.3 million, or 14.31%. The substantial increase in our sales was due to the higher capacity utilization coupled with higher sales volume for our products compared to the comparable period in 2012. In the three months ended March 31, 2013 we sold 184,581 metric tons of chemical products at an average price of $1,135 per metric ton, as compared to the sale of 155,235 metric tons of chemical products at an average price of $1,181 per metric ton in the three months ended March 31, 2012. This represents a 19% increase in overall metric tons sold.

25

Cost of Sales:Our overall cost of sales was approximately $200.7 million for the three months ended March 31, 2013, or 96% of sales, as compared to cost of sales of approximately $173.9 million, or 95% of sales for the three months ended March 31, 2012. Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene, butadiene and carbinol), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The increase in the cost of sales was due to the higher sales volume in 2013.

Energy required for production of our products consists of water, electricity and steam, the costs of which are attributed to cost of sales rather than operating expense. The supply prices of these energy sources in China have historically been very stable as a result of PRC government policy. Accordingly, the potential impact of changing energy costs to our production is minimal. Following are the costs for water, electricity and stream for the three months ended March 31, 2013 and 2012 (amounts in thousands):

For the Three Months Ended

March 31,

2013

(Unaudited)

2012

(Unaudited)

Water

395

278

Electricity

3,268

2,377

Steam

-

1,198

Total energy cost was approximately $4,159 for the three months ended March 31, 2013, which constitutes approximately 2% of sales. Total energy cost was approximately $14,110 in fiscal year 2012, which constitutes approximately 1.8% of sales.

26

Gross Profit: Gross profit for the three months ended March 31, 2013 was approximately $8.82 million as compared to $9.5 million for the comparable period in 2012, a decrease of approximately $0.65 million, or 6.87%. The decrease was mainly due to the increased cost of sales of $200.7 million in 2013 compared to $173.9 million in the same period in 2012.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $3.1 million, or 1.5% of sales for the three months ended March 31, 2013 as compared to $2.9 million, or 1.56% of sales for the comparable period in 2012, an increase of approximately $0.12 million. The increase was due to general increases in welfare expenses and business development expenses.

Interest Income/Expense (net):For the three months ended March 31, 2013, interest income and interest expense were approximately $0.75 million and $3.4 million, respectively; as compared to interest income and interest expense of approximately $0.9 million and $4.4 million, respectively, for the comparable period in 2012. The decrease in interest income / expense was mainly due to the lower interest rates.

Net Income/loss: Net income was approximately $2.9 million for the three months ended March 31, 2013, as compared to net income of approximately $1.6 million in the same period in 2012, an increase of $1.3 million, or 78%. This increase was mainly due to the decrease of financial expense in 2013, compared to the same period of 2012.

Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income and amounted to $0.5 million for the three months ended March 31, 2013. The balance sheet amounts, at March 31, 2013 and 2012, with the exception of equity, were translated at RMB6.27668 and RMB 6.29723 to 1.00 U.S. dollar respectively. The equity accounts were translated at their historical rates. The average translation rates applied to income statement accounts for the three months ended March 31, 2013 and 2012 were RMB 6.26566 and RMB 6.31313, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods indicated:

For the Three Months Ended

March 31,

2013

(Unaudited)

2012

(Unaudited)

Net cash used in operating activities

67,118

30,018

Net cash used in investing activities

11,382

10,353

Net cash provided by financing activities

75,026

55,847

27

Net cash used in operating activities was approximately $67.1 million for the three months ended March 31, 2013, as compared approximately $30 million for the same period in 2012. The increase was primarily caused by the increase in inventory, accounts payables, pre-payment to suppliers and consumption tax refunds receivable.

Net cash used in investing activities was approximately $11.4 million and $10.4 million for the three months ended March 31, 2013 and 2012, respectively. Net cash used in investing activities was primarily focused on payments for the infrastructure construction and the expansion of our facility. As we move forward with our expansion, it is expected that net cash used in investing activities will be consistent throughout 2013.

Net cash provided by financing activities amounted to approximately $75,026 million for the three months ended March 31, 2013. Net cash used in financing activities amounted to approximately $55.8 million for the same period in 2012. For the three months ended March 31, 2013, the net cash provided by financing activities was primarily through increased short-term bank borrowings.

The Company’s consolidated financial statements for the three months ended March 31, 2013, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company’s consolidated financial statements as of and for the year ended December 31, 2012, includes a “going concern” explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company’s ability to continue as a going concern.

In order to operate our business efficiently, we rely primarily on short-term bank financings to fund the purchase of raw materials. As of March 31, 2013, we had approximately $443 million of short-term bank borrowing. Short-term bank borrowings and bills payable were approximately $397.8 million as of December 31, 2012, and have increased to approximately $557 million as of March 31, 2013, and continued to increase to $677 million as of July 31, 2013. If one or more of these banks revoke their line of credit or fail to renew such line of credit when it is due, it would impact our capacity to continue to purchase raw materials in the amounts necessary to continue production at our current capacity. Management expects that short-term bank financing will continue to be available through at least the end of March 31, 2014. In addition, our major raw materials supplier provided short-term financing to us of approximately $29 million during 2012, of which $20 million was included in accounts payable at December 31, 2012 and was repaid on January 21, 2013. Interest paid for this financing amounted to approximately $0.43 million. In addition, on December 27, 2012, the supplier provided a non-interest bearing advance of approximately $10 million to the Company, that was repaid in full on January 8, 2013. Of the total amount of short-term financing of $800 million during 2012, approximately $39 million was from our major supplier, and additional short-term financing of approximately $75.3 million was provided by the supplier through July 2013. The Company believes the short-term financing from the supplier, which currently makes up a large proportion of our overall financing, has significantly impacted our liquidity by providing additional financing for our operations. The short-term financing is facilitated through the use of available letters of credit and our lines of credit, and enables lower costs of trade financing. We believe that we are in compliance with the terms of letters of credit with the banks and as of the date of this filing have not identified violations of the terms of our letters of credit due to short-term financing from vendors. However, due to the fact that we do not currently have established policies and procedures to provide for a complete and timely analysis of possible contingencies associated with short-term financings from suppliers and the evaluation of legal and regulatory considerations related to those business activities, we cannot assure that a full evaluation will not reveal violations of the terms of letters of credit. We intend to perform an evaluation to ensure full compliance. In addition to the forms of the letters of credit filed as Exhibits 10.52 and 10.53 in the amendment to registration statement on Form S-1, filed with the SEC on September 26, 2012, we hereby file another form of letter of credit in this Form 10-Q as Exhibit 10.3.

In addition, the Company is closely monitoring its cash balances, cash needs and expense levels.

Consumption Tax Refund

As of March 31, 2013 and December 31, 2012, the Group recorded an estimated consumption tax refund amounting to approximately $76.9 million and $51.3 million, respectively.In July 2013, a refund of approximately $67.7 million was received, and a refund of $25 million is expected to be approved and received by the end of August 2013.

28

Bank Loans

We have entered into loan agreements with our primary lenders, Bank of China, China Construction Bank, Agricultural Bank of China, etc. under which we have term loans. As of March 31, 2013, we had an aggregate principal amount of approximately $443 million in bank loans outstanding under the loan agreements, with maturity dates from April 2013 to March 2014 and interest rates from 1% to 6.7% per annum.

Before we enter into loan agreements with a lender, the lender will approve a comprehensive credit line which is the maximum amount of the loans we can obtain from the lender within a certain time period. The comprehensive credit line is usually secured by one or more third party guaranties or liens on our property and equipment, or a security deposit. Once the comprehensive credit line is approved, we will enter into an individual loan agreement with the lender each time we obtain a loan from the lender under the credit line. Therefore, we typically have multiple loan agreements under one comprehensive credit line with one lender as long as the credit limit has not been reached. Though different lenders have different forms for loan agreements, loan agreements usually contain similar material terms such as the amount of a loan, the term of a loan, interest rate, etc. In addition, some loan agreements specify the purposes of loans, and lenders are permitted to monitor the use of loans and our business. The loan agreements generally do not require us to maintain specific ratios or working capital requirements. In the event that lenders observe abnormal use of a loan or a substantial loss in our business or other event that could potentially have a substantial negative impact on our ability to repay the loans on time, they can either amend or terminate the loan agreements, or request additional financial covenants to secure the loans. If we fail to repay loans in a timely manner, or fail to obtain written consent from the lenders regarding extension/renewal applications, we may be subject to default interest or the loans may be canceled. Historically, we have no record of default on any of our loans and, as a result, we do not anticipate that our loans will not be renewed when their terms expire. However, we cannot guarantee that one or more of our loans will not be renewed or extended at the end of their terms, which could have a material negative impact upon our liquidity which could impact our ability to purchase raw materials, make upgrades and improvements to our infrastructure or otherwise negatively impact our business and operations.

As of March 31, 2013, 60% of our bank loans (approximately USD $149 million) were guaranteed by our related parties. Usually, a guaranty agreement is executed among a third party, a lender and us pursuant to a credit line approved by the lender. Though different lenders use different forms for loan guaranty agreements, loan guaranty agreements usually contain substantially similar terms. According to a loan guaranty agreement, the guarantor is jointly liable for all our debts to the lender under the corresponding loan agreements and the lender can bring legal action against the guarantor for damages in the event there is a default or breach of any loan agreement under the credit line. The guaranty is independent of any loan agreement under the credit line and irrevocable. In addition, if the credit line is extended or renewed, a written consent from the guarantor is required. Otherwise, the guarantor is only liable for loans under loan agreements that were executed during the original term of the credit line. Beginning in January 2011, certain individual loan guarantors, some of whom are related parties, were paid a monthly fee of approximately 0.3% of the outstanding loan balances as compensation for their guarantees. Through December 31, 2010, no compensation was paid in respect of these guarantees. During the three months ended March 31, 2013 and 2012, expenses related to loan guarantee fees were approximately $0.5 million and $0.5 million, respectively. As of March 31, 2013, there was $0.5 million of accrued and unpaid guarantee fees. Historically, all debts have been repaid by the Company in a timely manner. All short-term bank loans are revolving loans whose terms (at the due date of payment) are generally extended by the lender. As of March 31, 2013, we were in compliance with the terms of our loan agreements. As such, management expects most unpaid loan balances will be extended at their due dates. Depending on our capital needs, the Company evaluates whether to apply for additional long-term bank loans. The Company currently has sufficient lines of credit with its banks for both short-term and long-term borrowings.

However, we are working to refining our manufacturing capacity to include an ABS facility, an oil catalytic cracking processing facility, an increased annual design capacity of ethylene-styrene facility to 200,000 MT, a transformer oil facility and a SSBR production facility. The total cost of additional processing equipment for products refinement and SSBR production facility is approximately $149.3 million, including $49.8 million for additional processing equipment and $99.5 million for our SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs. We plan to fund this proposed expansion through debt financing, cash from operations, proceeds from prior financings, warrant exercises, and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to increase our production capacity and to expand our business could be adversely affected.

29

Loan guarantees provided by certain other parties during the three months ended March 31, 2013 and 2012 are as follows:

(a) Guarantees for Bank Loans

Guarantee provided during for

three months ended March 31,

Bank loans Guaranteed as of

2013

2012

Mar 31, 2013

Dec 31, 2012

($’000)

($’000)

($’000)

($’000)

(Unaudited)

(Unaudited)

(Unaudited)

Mr. Chunfeng Tao

-

-

-

$

15,840

Jicun Wang and Sumei Chen

-

-

-

$

1,899

Ningbo Pacific

-

-

$

70,086

$

23,976

Total

-

-

$

70,086

$

41,715

Beginning in January 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. During the three months ended March 31, 2013, loan guarantee fees were approximately $0.02 million for Ningbo Pacific. In 2012, loan guarantee fees were approximately $0.03 million and $0.06 million for Ningbo Hengfa and Ningbo Pacific, respectively.

(b) Amounts due from related parties consist of the following.

For three months ended March 31,

2013

2012

($’000)

($’000)

(Unaudited)

(Unaudited)

Ningbo Xinhe

650

-

(c) Amounts due to related parties consist of the following.

For three months ended March 31,

2013

2012

($’000)

($’000)

(Unaudited)

(Unaudited)

Ningbo Xinhe

-

114

30

(d) Related Party Transactions

The Company considers all transactions with the following parties to be related party transactions.

Name of parties

Relationship

Mr. Chunfeng Tao

Majority stockholder

Mr. Jicun Wang

Principal stockholder

Mr. Peijun Chen

Principal stockholder

Ms. Sumei Chen

Member of the Company’s Board of Supervisors and spouse of Mr. Wang

Ms. Yushui Huang

Vice President of Administration, Ningbo Keyuan

Ningbo Pacific Ocean Shipping Co., Ltd

100% ownership by Mr. Wang

(Ningbo Pacific)

Ningbo Xinhe Logistic Co., Ltd

10% ownership by Ms. Huang

(Ningbo Xinhe)

Ningbo Kunde Petrochemical Co, Ltd.

Mr. Tao’s mother was a 65% nominee shareholder

(Ningbo Kunde)

for Mr. Hu, a third party through September 2011

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Acting Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and were ineffective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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(b) Changes in Internal Control over Financial Reporting

In connection with the preparation of our financial statements for the fiscal year ended December 31, 2012, the management determined that our internal control environment is not properly designed due to the existence of certain material weaknesses and that it did not operate effectively to ensure that the Company’s financial statements (and related financial statement disclosures) were prepared in accordance with US generally accepted accounting principles (US GAAP). We have established a number of remediation measures, which we believe will remediate the material weaknesses identified, if such measures are effectively implemented and maintained. As of the end of the period covered by the report, we continue the process of implementing and maintaining the remediation measures, but we cannot assure when or if we will be able to successfully implement these remedial measures. For more information regarding our controls and procedures, please refer to Item 9A. Controls and Procedures in our Annual Report on Form 10-K for fiscal year ended December 31, 2012, filed with the SEC on June 6, 2013.

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

On November 15, 2011, the Rosen Law Firm filed a class action suit, alleging we had violated federal securities laws by issuing materially false and misleading statements and omitting material facts with regard to disclosure of related party transactions and effectiveness of internal controls in past public filings. The case is currently at the discovery stage, located in the United States District Court for the Central District of California,and we believe there is no basis to the suit filed by the Rosen Law Firm and intend to contest the case vigorously.

On January 9, 2012, Ningbo Keyuan filed a law suit in Ningbo Beilun District People’s Court against Zhenjiang Kaiyuan Installation Group (now known as Zhenjiang Industry Equipment Installation Group Co., Ltd) in breach of a project construction contract and alleged damages of RMB 98,000. Zhenjiang Industry Equipment filed a counter claim requiring us to pay RMB 9,825,615 of project cost and RMB 1,350,000 of interest. The two parties have settled the case on April 12, 2012, and Ningbo Keyuan agreed to pay Zhenjiang Industry Equipment a total amount of RMB 7,220,000 (approximately $1,144,738).

In June 2012, Ningbo Keyuan filed a law suit in Ningbo Beilun District People’s Court against Ningbo Lianneng Thermo Co., Ltd (“Ningbo Lianneng”) in a dispute over a power supply contract alleging damages of RMB 10,964,366 (approximately $1,740,300). In August 2012, Ningbo Lianneng filed a counter claim in Ningbo Intermediate People’s Court (the “Intermediate Court”) against Ningbo Keyuan for the same dispute for RMB 15,444,539 (approximately $ 2,451,500). A civil trial for the counter claim was held at the Intermediate Court on August 30, 2012, but no decision was made. In addition, Ningbo Keyuan filed the same law suit in the Intermediate Court in late August 2012, and a civil trial for this claim was held on October 18, 2012. No decision has been made as of the date of this filing.

On February 28, 2013, the Company reached a settlement in a case filed by the Securities and Exchange Commission (“SEC”) in the United States District Court for the District of Columbia against the Company, alleging the Company violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 thereunder. Under the terms agreed to by the Company and the SEC, the Company, without admitting or denying the allegation of the complaint, will pay a civil penalty of $1million and will be permanently enjoined from violating certain securities law. On July 2, 2013, the settlement was approved by the United District Court for the District of Columbia, and final judgment was issued.

Other than as set forth herein, we are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not Applicable.

(b) Not Applicable.

(c ) Not Applicable

ITEM 3. Defaults upon Senior Securities

(a) Not Applicable.

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(b) Not Applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) Not applicable.

ITEM 6. EXHIBITS

(a) The following exhibits are filed as part of this report.

2.1

Share Exchange Agreement dated April 22, 2010 (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on April 28, 2010)

2.2

Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on May 19, 2010)

3.1

Amended Articles of Incorporation of Keyuan Petrochemicals, Inc. (f/k/a Silver Pearls, Inc.), filed with the Secretary of State of Nevada (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-1 filed on December 29, 2010).

3.2

Articles of Merger (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on May 19, 2010)

3.3

Amended Bylaws of Keyuan Petrochemicals, Inc. dated June 29, 2010 (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on July 7, 2010)

4.1

Certificate of Designation of Rights and Preferences of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K filed on April 28, 2010)

4.2

Certificate of Designation of Rights and Preferences of Series M Preferred Stock (incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K filed on April 28, 2010)

4.3

Certificate of Designation of Rights and Preference of Series B Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on September 30, 2010)

WHEREBY, the undersigned parties agreed to sign this contract in comply with applicable laws.

Article 1. Preconditions

Inward Bills under this contract shall meet the following requirements:

1.

This contract has already been effective;

2.

Party A obligates and signs the related documents, receipts, seal, related person’s name lists and samples of signatures for party B, and also fills in relevant certificates;

3.

Party A opens the required account to fulfill this contract;

4.

Party A arranges the required legal and administrative approval process to facilitate the business properly, and submits the duplicate copy of the approval documents and the copies of the original documents as requested by Party B;

5.

The guarantee on the provision of this contract has been effectively established;

Amount: (Spell-Out) Twenty One Million Three Thousand Three Hundred Ninety Three Point Sixty

(Numeric)USD 21,003,393.60

Article 4. The Term of Inward Bills

The term of Inward Bills is / months/ 120 days, beginning to calculate since the date of Party B made foreign payment.

If sale price of the imported products has been collected before the closing of the financing, Party B has the right to consider the final collection date as the closing date of the financing. Party A agrees to use the payment for sale of imported products it receives to repay Party A of the financing amount.

(1) Settlement with quarter, 20th of each last month per quarter as the interest settlement day, and the 21st as the payment day.

2

(2) Settlement with month, 20th of each month as the interest settlement day, and the 21st as the interest payment day.

(3) Same as expiration date of principal.

(4) Receive the interest in advance and settle when expiration date.

On the condition that the final payment day of the financing principal is not the same date of interest payment day, then the final payment day is considered as interest payment day and Party A shall pay off the entire interest.

4. Default interest

(1) If Party A fails to return the payment of Inward Bills within the agreed time, as for the overdue payment, the default interest shall begin accruing according to the default interest rate starting from the date of late payment until both the principal and interest are paid off.

(2) If Party A fails to pay the interest and default interest in time, it can be penalized with compound interest per month/per quarter according to agreed default interest in this contract.

(3) Default interest rate

A. Default interest rate is a floating rate, the floating period is / month/ /year. In every floating period, the default interest shall be re-priced on the default date. The re-pricing date is the corresponding date in the month of the default date. If there is no corresponding date in the same month, then the last date of the month is the re-pricing date.
B. Default interest rate equals to the benchmark interest rate in the item C below plus 20%.

C. In the first floating period, the benchmark interest rate is the financing interest rate item 1 of this Article. After each full floating period, the benchmark interest rate shall be calculated as below:

Financing in RMB, it floats upward/ floats downward according to the same level loan benchmark interest rate issued by the People’s Bank of China in the re-pricing day.

Financing with foreign currency,

It is the loan interest rate within the same floating period of / years of the re-pricing day implemented by Bank of China, Inc.

√ It equals to the latest floating period obtained from Reuters of the prior day of re-pricing day before 9:00 (Beijing time) pluses 150 points.

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Article 6. Fees

Party A shall pay the related fees related to the business under this contract in time and the Party B decides the calculation basis, standard and method, etc.

Party A pays the above fees through the __second__ method:

1. In __/__ banking day since this contract became effective, pay with __/___.

2. Party B is authorized to deduct from the Party A’s account (Account No.:361058330713)

3. Other methods:____________________/_______________.

Article 7. Other Rights and Obligations of the Parties

Party B has the right to handle the full set of documents/goods under the inward bills business or other guarantee right/ property right pursuant to applicable laws and regulations. According to applicable laws and regulations or the verdict of the courts and arbitral authorities, the right to handle the full set of documents/goods under the Inward Bills business belongs to Party A, then Party A agrees to transfer this right to party B unconditionally to the maximum extent allowed by applicable law and regulations and accept performance and non- performance of Party B to handle the documents/goods. If according to applicable laws and regulations or the verdict of the courts and arbitral authorities, the right to handle the full set of documents/goods under the Inward Bills business belongs to Party B, then Party B retains this right till Party A completely pays off the financing.

When Party A requests to hold receipts/goods, and repays the financing with sales income, Party A is only acting as Party B’s consignee, including but not limited to safekeeping relevant receipts, handling storage, transportation and other related matters under those receipts, and maintain sales fund or deposit it to specific account of Party B. Party A shall disclose this role when selling the goods to a third party.

Party A shall be responsible for all the fees (including but not limited to insurance, storage, transport and wharf) during period when Party A retains the goods. Party A promises to insure the goods according to the market price of the goods, indicate Party B as the insured and provide the insurance documents to Party B. Party B has the right to claim directly when insured cargo endures loss.

Without the permission of Party B, party A is not allowed to delay payment or handle the goods through any non-currency method or at the price lower than the market price. Party A is not

allowed to mortgage or pledge, or make the goods to be bound by any other liens. Once requested by Party B, Party A shall submit the details of the goods’ accounts, any sales revenue or relevant sales contracts to party B; Party B has the right to enter into the warehouse to review the actual situations of the goods, or repossess these goods.

In case the pledgor is a third party, Party B and the pledgor shall enter into additional margin pledge contract.

√ This contract is the main contract of < General Agreement of Margin Pledge>, and the agreement provides margin pledge and submit corresponding <Certification of Margin Pledge> or handle directly as following ways rather submit <Certification of Margin Pledge>:

1) Margin Amount: (Currency) RMB ; (Spell-Out)

2) Party A pay for above margin with following method:

Within / banking days since the effective date of this contract, Party A will deposit or load margin to the margin account opened in Party B with .

Entrusted Party B to load the margin to the margin account opened in Party B from the RMB account in Party B.

Party A ‘s guarantee liability of margin under business has been removed, and Party A authorized Party B to load the margin to margin account opened in Party B directly from account.

Others:

3) In case above guarantee liability of margin has been removed by Party B, Party B shall return according to following methods:

Return to the Party A’s account.

Return according to the deposit route.

Return according to the written instruction of Party A.

Others: .

If Party B believes that Party A or guarantee occurred matters potentially affect the contractual capacity, or guarantee contract becomes invalid, terminated or cancelled, or financial conditions of Party A or guarantor gets worse or they enter into major litigation or arbitration, or any other factors that may affect their ability to perform their contractual obligations, or the value of guaranty gets worse or lost due to devaluation, destruction, losses, or being closed down, Party B has the right to demand and Party A has the obligation to provide new guarantee, replace the guarantor to bear the liability under this contract.

Article 9. Party A’s Statements and Commitment

Statements as follows:

1. Party A registers and survives by law, and possess the complete capacity of civil rights needed to fulfill this contract;

2. Party A signs and fulfills this contract based on true intention, has obtained the legal and effective authority according to the requirements of the Articles of Incorporation or other internal management documents, and is not allowed to violate any binding agreement, contract and other legal documents; Party A has gained or will gain all the relevant approvals, permits, files or registers.

5

3. All the documents and certificates provided by party A to Party B is authentic, complete, accurate and effective under this contract;

4. The trading background described by party A to party B is authentic and legal, and does not have the illegal purpose such as money laundering. Party A providing any documents according to party B’s requirements does not mean that party B has the obligations and responsibilities of inspection towards the authenticity and legality of party A’s trade;

5. Party A will not hide any truths that may influence both parties’ financial situation and contractual capacity.

Commitments as follows:

1. Provide the statement of products sales regarding the import items in timely manner according to Party B’s requirement.

2. If Party A has already signed or will sign counter-guarantee agreement or other similar agreements about the guaranteed obligations with the guarantor of this contract, then the agreement will not damage any rights owned by party B under this contract;

3. If the products sales of the import items have serious difficulties, or situations that may influence both parties’ financial conditions and capacity to fulfill this contract, including but not limited to the change of any business pattern of dismantlement, merger, affiliation, joint venture with foreign merchants, cooperation, contractual operation, reorganization, reformation and listing program, reduction of registered capital, assignment of significant property or stock right, commitment of significant liabilities, or installation of new significant liabilities on the pledge, or involvement to grave litigation or arbitration cases, party A shall inform party B in time;

4. As for pending matters, Party A agrees to handle according to the international conventions and agreement with Party B.

Article10. Disclosure of Related Parties of Party A and Related Transactions

The __ _ item below is applicable to both parties:

1. Party A does not belong to the group client of party B according to the Management Guidance of Credit Extension Business Risk of Commercial Bank Group (short for Guidance).

2. Party A belongs to the group client of party B according to Guidance. Party A shall report the situation of related transactions over 10% net assets in time, including the related relationship, trading projects, trading properties, trading amount, corresponding proportion and pricing policy and so on (including the trade with no capital but only proportion capital).

Article 11. Default Events

Party A will be considered in violation of this contract if one of the following events happens:

1. Party A fails to fulfill its obligations to pay and repay to the party B according to this contract;

6

2. The statements made by party A is untrue or default the commitments under this contract;

3. The matters mentioned in No.3 of Item 2 in Article 9 happen; Party B considered those may affect the financial conditions and contractual capability of Party A or guarantor, and Party A has not provided new guarantee, replaced guarantor in accordance with the provisions of this contract.

4. Party A closes down or is subject to disincorporation, revocation or bankrupt.

5. Party A defaults other covenants in this contract;

6. Party A default the other contracts signed with Party B or other institutions of Bank of China, Inc.

7. Guarantor defaults the covenants of guarantee contract, or other contracts signed with Party B or other institutions of Bank of China, Inc.

When any of the above mentioned events occur, Party B has the right to take one or some following actions:

1. Request Party A and/or guarantor to amend the default behaviors within limited time;

2. Entirely or partly suspend or terminate Party A’s business applications under this contract or the other contracts, entirely or partly suspend or terminated to grant and handle the un-granted loans, holding trading financing;

3. Announce the unpaid loans/financing principals and interests and the other account payables to entirely or partly expire.

4. Terminate or revoke this contract, entirely or partly terminate or revoke the other contracts between Party A and Party B;

5. Request Party B to compensate the liquidated damages;

6. Deduct funds from Party A’s account to repay entirely or partly liability under this contract.

The undue funds in this account will be considered due in advance. If the account currency is different from the business currency of Party B, convert according to the applicable rate of Party B.

7. Execute real guarantee;

8. Request guarantor to bear guarantee liability;

9. Other measures considered necessary by Party B.

7

Article 12. Reservation of the Rights

If one party fails to fulfill entire or part rights under this contract or request the other party to fulfill, undertake entire or part obligations, responsibilities, it shall not be considered to waive the obligations or responsibilities.

Any party’s tolerance or extension or delay execution of the rights under this contract towards another party shall not affect the rights under this contact and laws and regulations, also not considered to waive the rights.

Article 13. Amendment, Modification and Termination

This contract can be amended or modified in writing mutual agreement. Any amendments or modifications are inseparable parts of this contract.

Unless otherwise specified by laws or regulations or covenants, this contract is not allowed to terminate till the rights and obligations are completely executed.

Unless otherwise specified by laws or regulations or covenants, invalidation of any items under this contract will never affect the other items’ legal effectiveness.

Article 14. Applicable Laws and Settlement

This contract shall be governed by the laws of PRC.

After this contract becomes effective, all disputes concerning this contract should be settled through friendly negotiation. When negotiation fails, any party can settle with following second method;

1. Submit to ___________________Arbitration Committee to arbitrate.

2. Submit to the People’s court located in the domicile of Party B or other corresponding institutions of Bank of China, Inc.

3. Prosecute the People's Courts with jurisdiction.

During the settlement period, if this dispute does not affect the performance of this other items, the other items shall continue to performance,

Article 15. Attachment

The following attachments and other attachments ensured by both parties makes up the inseparable parts of this contract, and possess the equal legal validity.

1,__________/_______;

2,__________/_______;

Article 16. Other Covenants

1. Without Party B’s written consent, Party A is not allowed to transfer rights or obligations to the third parties.

2. If Party B entrusts any other institutes of Bank of China to execute the rights and obligations under this contract, Party A shall agree. Party B or its designees are entitled to exercise all the rights under this agreement and to file a lawsuit in the People's Courts or submit to the Arbitration Committee to arbitrate.

8

3. In case of not affecting the other covenants of this contract, this contract has the legal binding to the heirs and transferees.

4. Apart from the other covenants, the address specified in this contract by both parties is regarded as the contract address, and also promise that when the contract address changes, then information will sent to the party in written form in time.

5. The titles and business names in this contract are just used for the purpose of convenience, and can’t be used for the purpose to explain the clause content, and obligations and rights of the party.

6. Per the changes of laws and regulations or regulatory process or the requirements of regulatory authority, Party B is unable to execute this agreement or execute according to covenants, Party B has the right to terminate or amend this agreement or single agreement according to the changes of laws and regulations or regulatory process or the requirements of regulatory authority and exemption from liability.

Article 18. Conditions for effectiveness

This contract becomes effective upon the signature and seal of the legal representatives of both parties, principals or the authorized persons.

This contract made in duplicate, each party has one copy, both having the same legal effects.

WHEREBY, the undersigned parties agreed to sign this contract in comply with applicable laws.

Article 1. Preconditions

Inward Bills under this contract shall meet the following requirements:

1.

This contract has already been effective;

2.

Party A obligates and signs the related documents, receipts, seal, related person’s name lists and samples of signatures for party B, and also fills in relevant certificates;

3.

Party A opens the required account to fulfill this contract;

4.

Party A arranges the required legal and administrative approval process to facilitate the business properly, and submits the duplicate copy of the approval documents and the copies of the original documents as requested by Party B;

5.

The guarantee on the provision of this contract has been effectively established;

Amount: (Spell-Out) Twenty Two Million Seven Hundred Twenty Five Thousand Point One

(Numeric)USD 22,725,000.1

Article 4. The Term of Inward Bills

The term of Inward Bills is / 12 months/ days, beginning to calculate since the date of Party B made foreign payment.

If sale price of the imported products has been collected before the closing of the financing, Party B has the right to consider the final collection date as the closing date of the financing. Party A agrees to use the payment for sale of imported products it receives to repay Party A of the financing amount.

(1) Settlement with quarter, 20th of each last month per quarter as the interest settlement day, and the 21st as the payment day.

2

(2) Settlement with month, 20th of each month as the interest settlement day, and the 21st as the interest payment day.

(3) Same as expiration date of principal.

(4) Receive the interest in advance and settle when expiration date.

On the condition that the final payment day of the financing principal is not the same date of interest payment day, then the final payment day is considered as interest payment day and Party A shall pay off the entire interest.

4. Default interest

(1) If Party A fails to return the payment of Inward Bills within the agreed time, as for the overdue payment, the default interest shall begin accruing according to the default interest rate starting from the date of late payment until both the principal and interest are paid off.

(2) If Party A fails to pay the interest and default interest in time, it can be penalized with compound interest per month/per quarter according to agreed default interest in this contract.

(3) Default interest rate

A. Default interest rate is a floating rate, the floating period is / month/ /year. In every floating period, the default interest shall be re-priced on the default date. The re-pricing date is the corresponding date in the month of the default date. If there is no corresponding date in the same month, then the last date of the month is the re-pricing date.
B. Default interest rate equals to the benchmark interest rate in the item C below plus 20%.

C. In the first floating period, the benchmark interest rate is the financing interest rate item 1 of this Article. After each full floating period, the benchmark interest rate shall be calculated as below:

Financing in RMB, it floats upward/ floats downward according to the same level loan benchmark interest rate issued by the People’s Bank of China in the re-pricing day.

Financing with foreign currency,

It is the loan interest rate within the same floating period of / years of the re-pricing day implemented by Bank of China, Inc.

√ It equals to the latest floating period obtained from Reuters of the prior day of re-pricing day before 9:00 (Beijing time) pluses 80 points.

3

Article 6. Fees

Party A shall pay the related fees related to the business under this contract in time and the Party B decides the calculation basis, standard and method, etc.

Party A pays the above fees through the __second__ method:

1. In __/__ banking day since this contract became effective, pay with __/___.

2. Party B is authorized to deduct from the Party A’s account (Account No.:361058330713)

3. Other methods:____________________/_______________.

Article 7. Other Rights and Obligations of the Parties

Party B has the right to handle the full set of documents/goods under the inward bills business or other guarantee right/ property right pursuant to applicable laws and regulations. According to applicable laws and regulations or the verdict of the courts and arbitral authorities, the right to handle the full set of documents/goods under the Inward Bills business belongs to Party A, then Party A agrees to transfer this right to party B unconditionally to the maximum extent allowed by applicable law and regulations and accept performance and non- performance of Party B to handle the documents/goods. If according to applicable laws and regulations or the verdict of the courts and arbitral authorities, the right to handle the full set of documents/goods under the Inward Bills business belongs to Party B, then Party B retains this right till Party A completely pays off the financing.

When Party A requests to hold receipts/goods, and repays the financing with sales income, Party A is only acting as Party B’s consignee, including but not limited to safekeeping relevant receipts, handling storage, transportation and other related matters under those receipts, and maintain sales fund or deposit it to specific account of Party B. Party A shall disclose this role when selling the goods to a third party.

Party A shall be responsible for all the fees (including but not limited to insurance, storage, transport and wharf) during period when Party A retains the goods. Party A promises to insure the goods according to the market price of the goods, indicate Party B as the insured and provide the insurance documents to Party B. Party B has the right to claim directly when insured cargo endures loss.

Without the permission of Party B, party A is not allowed to delay payment or handle the goods through any non-currency method or at the price lower than the market price. Party A is not

allowed to mortgage or pledge, or make the goods to be bound by any other liens. Once requested by Party B, Party A shall submit the details of the goods’ accounts, any sales revenue or relevant sales contracts to party B; Party B has the right to enter into the warehouse to review the actual situations of the goods, or repossess these goods.

In case the pledgor is a third party, Party B and the pledgor shall enter into additional margin pledge contract.

√ This contract is the main contract under the 2010 lun G2 -05-01-014 of < General Agreement of Margin Pledge>, and the agreement provides margin pledge and submit corresponding <Certification of Margin Pledge> or handle directly as following ways rather submit <Certification of Margin Pledge>:

Within 1 / banking days since the effective date of this contract, Party A will deposit or load margin to the margin account opened in Party B with transfer check. (account no: 396162796142).

Entrusted Party B to load the margin to the margin account opened in Party B from the RMB account in Party B.

Party A ‘s guarantee liability of margin under business has been removed, and Party A authorized Party B to load the margin to margin account opened in Party B directly from account.

Others:

3) In case above guarantee liability of margin has been removed by Party B, Party B shall return according to following methods:

Return to the Party A’s account.

Return according to the deposit route.

Return according to the written instruction of Party A.

Others: .

If Party B believes that Party A or guarantee occurred matters potentially affect the contractual capacity, or guarantee contract becomes invalid, terminated or cancelled, or financial conditions of Party A or guarantor gets worse or they enter into major litigation or arbitration, or any other factors that may affect their ability to perform their contractual obligations, or the value of guaranty gets worse or lost due to devaluation, destruction, losses, or being closed down, Party B has the right to demand and Party A has the obligation to provide new guarantee, replace the guarantor to bear the liability under this contract.

Article 9. Party A’s Statements and Commitment

Statements as follows:

1. Party A registers and survives by law, and possess the complete capacity of civil rights needed to fulfill this contract;

2. Party A signs and fulfills this contract based on true intention, has obtained the legal and effective authority according to the requirements of the Articles of Incorporation or other internal management documents, and is not allowed to violate any binding agreement, contract and other legal documents; Party A has gained or will gain all the relevant approvals, permits, files or registers.

5

3. All the documents and certificates provided by party A to Party B is authentic, complete, accurate and effective under this contract;

4. The trading background described by party A to party B is authentic and legal, and does not have the illegal purpose such as money laundering. Party A providing any documents according to party B’s requirements does not mean that party B has the obligations and responsibilities of inspection towards the authenticity and legality of party A’s trade;

5. Party A will not hide any truths that may influence both parties’ financial situation and contractual capacity.

Commitments as follows:

1. Provide the statement of products sales regarding the import items in timely manner according to Party B’s requirement.

2. If Party A has already signed or will sign counter-guarantee agreement or other similar agreements about the guaranteed obligations with the guarantor of this contract, then the agreement will not damage any rights owned by party B under this contract;

3. If the products sales of the import items have serious difficulties, or situations that may influence both parties’ financial conditions and capacity to fulfill this contract, including but not limited to the change of any business pattern of dismantlement, merger, affiliation, joint venture with foreign merchants, cooperation, contractual operation, reorganization, reformation and listing program, reduction of registered capital, assignment of significant property or stock right, commitment of significant liabilities, or installation of new significant liabilities on the pledge, or involvement to grave litigation or arbitration cases, party A shall inform party B in time;

4. As for pending matters, Party A agrees to handle according to the international conventions and agreement with Party B.

Article10. Disclosure of Related Parties of Party A and Related Transactions

The first item below is applicable to both parties:

1. Party A does not belong to the group client of party B according to the Management Guidance of Credit Extension Business Risk of Commercial Bank Group (short for Guidance).

2. Party A belongs to the group client of party B according to Guidance. Party A shall report the situation of related transactions over 10% net assets in time, including the related relationship, trading projects, trading properties, trading amount, corresponding proportion and pricing policy and so on (including the trade with no capital but only proportion capital).

Article 11. Default Events

Party A will be considered in violation of this contract if one of the following events happens:

1. Party A fails to fulfill its obligations to pay and repay to the party B according to this contract;

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2. The statements made by party A is untrue or default the commitments under this contract;

3. The matters mentioned in No.3 of Item 2 in Article 9 happen; Party B considered those may affect the financial conditions and contractual capability of Party A or guarantor, and Party A has not provided new guarantee, replaced guarantor in accordance with the provisions of this contract.

4. Party A closes down or is subject to disincorporation, revocation or bankrupt.

5. Party A defaults other covenants in this contract;

6. Party A default the other contracts signed with Party B or other institutions of Bank of China, Inc.

7. Guarantor defaults the covenants of guarantee contract, or other contracts signed with Party B or other institutions of Bank of China, Inc.

When any of the above mentioned events occur, Party B has the right to take one or some following actions:

1. Request Party A and/or guarantor to amend the default behaviors within limited time;

2. Entirely or partly suspend or terminate Party A’s business applications under this contract or the other contracts, entirely or partly suspend or terminated to grant and handle the un-granted loans, holding trading financing;

3. Announce the unpaid loans/financing principals and interests and the other account payables to entirely or partly expire.

4. Terminate or revoke this contract, entirely or partly terminate or revoke the other contracts between Party A and Party B;

5. Request Party B to compensate the liquidated damages;

6. Deduct funds from Party A’s account to repay entirely or partly liability under this contract.

The undue funds in this account will be considered due in advance. If the account currency is different from the business currency of Party B, convert according to the applicable rate of Party B.

7. Execute real guarantee;

8. Request guarantor to bear guarantee liability;

9. Other measures considered necessary by Party B.

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Article 12. Reservation of the Rights

If one party fails to fulfill entire or part rights under this contract or request the other party to fulfill, undertake entire or part obligations, responsibilities, it shall not be considered to waive the obligations or responsibilities.

Any party’s tolerance or extension or delay execution of the rights under this contract towards another party shall not affect the rights under this contact and laws and regulations, also not considered to waive the rights.

Article 13. Amendment, Modification and Termination

This contract can be amended or modified in writing mutual agreement. Any amendments or modifications are inseparable parts of this contract.

Unless otherwise specified by laws or regulations or covenants, this contract is not allowed to terminate till the rights and obligations are completely executed.

Unless otherwise specified by laws or regulations or covenants, invalidation of any items under this contract will never affect the other items’ legal effectiveness.

Article 14. Applicable Laws and Settlement

This contract shall be governed by the laws of PRC.

After this contract becomes effective, all disputes concerning this contract should be settled through friendly negotiation. When negotiation fails, any party can settle with following second method;

1. Submit to ___________________Arbitration Committee to arbitrate.

2. Submit to the People’s court located in the domicile of Party B or other corresponding institutions of Bank of China, Inc.

3. Prosecute the People's Courts with jurisdiction.

During the settlement period, if this dispute does not affect the performance of this other items, the other items shall continue to performance,

Article 15. Attachment

The following attachments and other attachments ensured by both parties makes up the inseparable parts of this contract, and possess the equal legal validity.

1,__________/_______;

2,__________/_______;

Article 16. Other Covenants

1. Without Party B’s written consent, Party A is not allowed to transfer rights or obligations to the third parties.

2. If Party B entrusts any other institutes of Bank of China to execute the rights and obligations under this contract, Party A shall agree. Party B or its designees are entitled to exercise all the rights under this agreement and to file a lawsuit in the People's Courts or submit to the Arbitration Committee to arbitrate.

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3. In case of not affecting the other covenants of this contract, this contract has the legal binding to the heirs and transferees.

4. Apart from the other covenants, the address specified in this contract by both parties is regarded as the contract address, and also promise that when the contract address changes, then information will sent to the party in written form in time.

5. The titles and business names in this contract are just used for the purpose of convenience, and can’t be used for the purpose to explain the clause content, and obligations and rights of the party.

6. Per the changes of laws and regulations or regulatory process or the requirements of regulatory authority, Party B is unable to execute this agreement or execute according to covenants, Party B has the right to terminate or amend this agreement or single agreement according to the changes of laws and regulations or regulatory process or the requirements of regulatory authority and exemption from liability.

Article 18. Conditions for effectiveness

This contract becomes effective upon the signature and seal of the legal representatives of both parties, principals or the authorized persons.

This contract made in duplicate, each party has one copy, both having the same legal effects.

Party A: Ningbo Keyuan Plastic Co., Ltd Party

B: Bank of China, Inc Beilun Branch

The authorized person:

The authorized person:

January 23, 2013

January 23, 2013

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EX-10.3
4
f10q0313ex10iii_keyuan.htm
TRANSLATION COPY OF THE FORM OF LETTER OF CREDIT BY AND BETWEEN NINGBO KEYUAN PLASTICS CO., LTD AND BANK OF CHINA
f10q0313ex10iii_keyuan.htm